Treasury Minister Danny Alexander will set out new rules on Monday to push ministries to tighten their grip on spending at a time of deep public cuts aimed at wiping out the country's huge budget deficit within five years.
Under the new rules, government departments will be asked to identify 5 percent of their annual budget to cover unexpected costs - in a bid to discourage them from asking for more money from central government when emergencies arise.
Departments will also have to open their books to the finance ministry each month, to improve financial management across government.
The new rules, due to take effect this year, are intended to help Britain keep control of its finances, retain the credibility of world markets and hold down its low borrowing costs, Alexander will say in a speech to the Institute of Fiscal Studies thinktank.
These rules have been drawn up with finance directors from across Whitehall, and are designed to fundamentally change and improve financial management across all organisations spending public money, Alexander will say, according to extracts of his speech released by his office.
The coalition government has embarked on an austerity drive aimed at wiping out a budget deficit that peaked at more than 10 percent of gross domestic product when it came to power in 2010. The government has achieved 30 percent of the spending cuts it envisaged in a four-year plan unveiled in 2010.
The government insists it will stick to its plans, despite criticism from the Labour Party that the austerity drive is choking off the fragile economic recovery.
Official data on Wednesday will show whether the economy fell back into a recession in the first quarter of 2012 after shrinking by 0.3 percent at the end of last year.
The Treasury hopes its latest measures will discourage departments from seeking to tap into the central reserves it sets aside every year to cope with unforeseen spending increases.
Half of government departments already have a small unallocated provision in their annual budget. The new rules will put that on a more formal basis across departments, requiring them all to set aside a rainy-day fund.
This is about making sure the existing plans can be delivered without recourse to additional funds, said a Treasury spokesperson. Departments should have enough in place to deal with changed priorities themselves.
In its 2010 spending review, the government dramatically reduced the amount of funds in that central rainy day pot this year to 2.8 billion pounds compared with 4 billion pounds in 2009/10.
Departments deemed by the Treasury to have poor financial management will be penalised by having limited access to the reserve fund. The amount they can spend without Treasury approval will be cut, along with their ability to roll-over funding from year to year.
On top of that, Alexander will go over the heads of top civil servants, and will go to Secretaries of State or the head of the civil service if he feels departments are wasting money.
Departments with good financial management will be rewarded with greater flexibility over their budgets and higher limits on what they can spend without prior Treasury approval.
(Editing by Andrew Heavens)